REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

FIRST DIVISION

THUNDERBIRD PILIPINAS HOTELS AND CTA CASE NO. 7902

RESORTS, INC.
Petitioner, Members:

ACOSTA, PJ,
-versus- UY, and,
FASON-VICTORINO, JJ.

COMMISSIONER OF INTERNAL Promulgated:

REVENUE, Respondent. Jul 1 8 2012; ; ;DIJp· .....

x--------------------------------------------------------------------------~--x
DECISION

ACOSTA, PJ:

This Petition for Review seeks the cancellation and withdrawal of the
deficiency income and expanded withholding tax assessments issued by
respondent against petitioner for taxable year 2006 in the amounts of
P9,917,601.26 and P5,414,109.74, respectively, inclusive of increments.

001190
DECISION
CTA Case No. 7902
Page 2

THE FACTS
As stipulated by the parties in the Joint Stipulation of Facts and Issues 1
and as borne by the records of this case , the following are the undisputed facts:

Petitioner is a domestic corporation duly incorporated and existing under

Philippines laws, with business address at VOA Pennsylvania Avenue, Poro
Point, San Fernando City, La Union. It is engaged in the business of conducting
and operating hotels, clubs , restaurants and all other businesses appurtenant
and/or related thereto. It is also registered as a Poro Point Special Economic and
Freeport Zone ("PPSEFZ") 2

Respondent is the duly appointed Commissioner of the Bureau of Internal

Revenue ("SIR") with power, among others , to decide disputed assessments of
deficiency internal revenue taxes and penalties imposed in relation thereto, with
office address at the Fifth Floor, SIR National Office Building , SIR Road, Diliman ,
Quezon City where she may be served with summons and other legal
processes.3

Petitioner filed its Annual Income Tax Return (ITR) for taxable year 2006
on April 16, 2007 with the SIR ROO No. 3. Revenue Region No. 1 in accordance
with Section 77 of the 1997 NIRC. 4

Petitioner's ITR for taxable year 2006 shows the amount of

P14,201 ,733.00 as deferred rent under Line 115 thereof as a reconciling item on
the company's net income per books against its taxable income.5

On November 19, 2008, Assessment Notice ("Assessment Notices") Nos.

IT-03-06-241-973-218 and WE-03-06-241-973-218 for deficiency income tax and
expanded withholding tax , respectively , together with a Formal Letter of Demand

1
Rollo, pp. 242-247.
2
Joint Stipulation of Facts and Issues (JSFI), Par. 1, Rollo, p. 242 .
3
Ibid, Par. 2, p. 242 .
4
ld, Par. 8, p. 244.
5
/d, Par. 10, p. 245.

001191
DECISION
CTA Case No. 7902
Page 3

("FLO"), were issued against petitioner by the BIR through the Office of the
Regional Director, Revenue Region No. 1 (Calasiao, Pangasinan), for the taxable
year 2006, in connection with the investigation conducted pursuant to Letter of
Authority No. 00072404 dated September 20, 2007. Petitioner received the
Assessment Notices and FLO on November 26, 2008.6

Pursuant to the Assessment Notices, the BIR assessed petitioner for

deficiency taxes in the aggregate amount of P15,331 ,711 .00, inclusive of interest
and penalties computed as follows :7

I. Income Tax
Gross Taxable Income per Return p 151,683,405.43
Add : Purchases Paid not in the name of Thunderbird 11,068,373.43
Taxable Income p 162,751 ,778.43

Tax Due p 8,137 ,588.92

Less: Basic Tax Paid 553,418.67
Basic Income Tax Deficiency p 7 ,584,170.25
Interest (4.16.07 to 10.30 .08) 2,333,431 .01
Total Deficiency Income Tax p 9,917,601.26

II. Expanded Withholding Tax

Deficiency Withholding Tax on Outside Services p 38,305.93
Deficiency Withholding Tax on Rent 1'134,402.22
Deficiency Withholding Tax on Legal and Professional Fees 759,895.33
Deficiency Withholding Tax on Marketing and Promotions 62,761 .90
Deficiency Withholding Tax on Director's Fee 10,279.99
Deficiency Withholding Tax on Management Fee 1,979,199.86
Total Expanded Withholding Tax Deficiency p 3,984,845.23
Add : Interest (1 .16.07 to 10.30.08) p 1,425,264 .51
Compromise Penalty (No January to March 1601-
E and 1604-E with Alphabetical List of Payees 4,000 .00 1,429,264.51
Total Deficiency Expanded Withholding Tax p 5,414,109.74

Total Tax Deficiency p 15,331,711.00

6
ld, Par. 3, p. 243.
7
/d, Par. 4 , p. 243-244.

001192
DECISION
CTA Case No. 7902
Page 4

However, as indicated in the FLO, basic deficiency income tax in the

amount of P533,418.67 arising from a disallowance of certain purchases that
were allegedly not in the name of petitioner, was already paid by petitioner on
May 8, 2008. The total amount paid was P761 ,557 .01 , including interest and
surcharge. 8

On December 23, 2008, petitioner filed with the Office of the Regional
Director, BIR Revenue Region No. 1, a formal protest letter9 against the
deficiency tax assessments, citing both legal and factual grounds.

On February 19, 2009 , petitioner filed with the Office of the Regional
Director, BIR Revenue Region No. 1 a supplemental protest dated February 18,
2009 and submitted supporting documents.10

Through his letter dated February 24, 2009, BIR OIC Regional Director
Tomas C. Rosales of Revenue Region No. 1 rendered a decision on petitioner's
protest, denying the same with finality and sought to enforce collection of the
alleged deficiency income tax and expanded withholding tax liability for taxable
year 2006, in the aggregate amount of P15,331 ,711 .00, inclusive of interest and
penalties. Petitioner received the said letter on March 4, 2009. 11

On March 30, 2009, petitioner received a collection letter from the

Revenue District Officer ("ROO") of San Fernando City, La Union, requesting
payment of the assessed tax within ten (1 0) days from receipt. Petitioner replied
on April 1, 2009 that it will appeal the decision of the Regional Director to the
Court of Tax Appeals on or before April 3, 2009, and consequently, requested the
ROO to defer collecting the tax pending petitioner's exhaustion of its legal
remedies under the law.12

8
ld, Par. 7, p. 244 .
9
Exhibit "P".
10
Exhibit "Q".
11
JSFI , Par. 5, p. 244.
12
ld, Par. 6, p. 244.

001193
DECISION
CTA Case No. 7902
Page 5

On April 3, 2009, petitioner filed the Petition for Review 13 . Thereafter, on

August 24, 2009, it filed a Motion to Suspend Collection of Tax. 14

On April 30, 2009, petitioner filed a Manifestation 15 submitting the correct

document marked as Annex "A".

On May 8, 2009, respondent filed a First Motion for Extension of Time to

File Answer.16

On May 15, 2009, the Court issued a Resolution 17 ordering the respondent
to file a comment to petitioner's Motion to Suspend Collection of Tax within fifteen
(15) days from notice and the petitioner to file a reply within five (5) days from
receipt of the comment.

On June 10, 2009, respondent filed a Motion to Admit Attached Comment

(Re: Comment on Petitioner's Motion to Suspend Collection of Taxes) 18 .

On June 24, 2009, petitioner filed its Manifestation 19 attaching its advance
copies of the Comment (to Respondent's Motion to Admit Comment) and Reply
(to Respondent's Attached Comment) which it sent through registered mail on
June 22, 2009.

On June 25, 2009, respondent filed a Motion to Admit Attached Answe~ 0 .

In her Answer21 , respondent raised the following special and affirmative

defenses:22

13
Rollo , pp. 4-51 .
1
• Rollo, pp. 53-67 .
15
Rollo, pp. 71 -73.
16
Rollo, pp. 82-85.
17
Rollo, pp. 87-88.
18
Rollo, pp. 89-100.
19
Rollo, pp. 101 -110.
20
Rollo, pp.111 -127.
21
Rollo 115-127.
22
supra.

001194
 DECISION
. CTA Case No. 7902
Page 6

4. Respondent adopts the abovementioned admission and denials

defenses as part of his special and affirmative defenses.

5. Petitioner failed to submit all the required documents under the

Notices sent by respondent.

5.1 On 21 September 2007, respondent sent a First Request for

Presentation of Records that required petitioner to submit the following
documents in relation to its 2006 Income Tax (IT), Value-Added Tax (VAT)
and Withholding Taxes for examination :

XXX XXX XXX

The First Request for Presentation of Records was signed by Revenue

Officer Ernesto B. Penullar who was duly authorized to conduct examination
on the books of accounts and records of petitioner for taxable year 2006 by
virtue of Letter of Authority No. 00072404 dated 20 September 2007. The
said First Request was received by a certain Maria Fe Ramos for petitioner.

5.2 On 23 October 2007 , respondent, through Revenue Officer Penullar,

sent a Second Request for Presentation of Records via registered mail.
Respondent reiterated the need for petitioner to present the accounting
records enumerated in the First Request. To emphasize this requirement,
Section 20 of Revenue Regulations No. V-1 was quoted thereon as follows:

"Inspection of Books, Register and Records - All books,

register and other records and vouchers such as invoices
required by regulations shall be kept at all times at the place
of business of the taxpayer, subject to inspection by any
Internal Revenue Office and upon demand , the same must be
immediately be produced and submitted for inspection ."

5.3 On 17 December 2007, respondent , through Revenue District Officer

Imelda A. Bueno , sent a Final Notice Before Issuance of Subpoena Duces
Tecum . In the Final Notice, the need for petitioner to present the documents
required under the previous notices were reiterated with emphasis on the
submission of all the required documents or face the consequence of having
a Subpoena Duces Tecum served upon petitioner. The Final Notice was
served by constructive notice on 17 December 2007 . Still , however,
petitioner refused to comply with the duty imposed upon it by law.

5.4 In a Memorandum for the Regional Director of Revenue District Office

No. 3 dated 21 January 2008, revenue Officer Penullar reported that
petitioner submitted photocopies of mandatory returns and made and oral
request that it be given additional time to submit disbursements books and
other source documents. Petitioner did not make good on its promise.

5.5 An audit under the auspices of LOA 00072404 conducted by

Revenue Officer Penullar revealed the following material findings and
discrepancies:

a. A total of P11 ,068 ,374.43 in trade purchases was paid for by

another corporation (East Bay Resorts, Inc.) and hence disallowed in
audit as taxpayer's paid purchases. Thus, petitioner was assessed
P8 ,049 ,313 .92 of gross income tax, excluding legal increments.

001195
DECISION
CTA Case No. 7902
Page 7

b. Compromise penalties, civil penalties and 20% interest were

imposed for late filing of 1601 C and 1601 E returns for the months of
April to November in the amounts of P911 ,540.29 and P254,726.77
respectively, pursuant to Revenue Memorandum Circular No. 19-2007
and Sections 248 and 249 of the National Internal Revenue Code of
1997.

c. Petitioner failed to file its Monthly Alpha List of Payees and its
year-end Inventory List, hence, petitioner was penalized P12,000.00 and
P1 ,000.00 respectively , in accordance with RMC No. 19-2007.

d. Although petitioner has not been notified officially as one of the

top 10,000 taxpayers, it has nevertheless started to deduct and remit
EWT as per schedule.

e. 25% surcharge and 20% interest pursuant to Section 248 and 249
of the NIRC of 1997.

f. The result of the audit investigation is that petitioner is liable for the
following internal revenue tax deficiencies: (i) income tax in the amount
of P11 ,682,505 .19; (ii) expanded withholding tax in the amount of
P254,726.77; and (iii) withholding tax on compensation in the amount of
P911 ,840.29.

Issuance of a Preliminary Assessment Notice to petitioner was therefore

recommended .

6. The assessment is valid based on the best evidence obtainable.

6.1 Petitioner's obstinate failure to comply with the First Request for
Presentation of Records, Second Request for Presentation of Records and
Final Notice Before Issuance of Subpoena Duces Tecum did not in the least
bit affect the valid ity of the assessment. Such lack of cooperation merely
hampered the proceedings.

6.2 Section 6(B) of the NIRC of 1997 reads in part:

"In case a person fails to file a required return or other

document at the time prescribed by law, or willfully or
otherwise files a false or fraudulent return or other document,
the Commissioner shall make or amend the return form his
own knowledge and from such information as he can obtain
through testimony or otherwise which shall be prima facie
correct and sufficient for all legal purposes."

By express provision of law, the photocopied documents sent by

petitioner, although incomplete, are correct and sufficient for all legal
purposes.

7. Petitioner's protest failed to sufficiently refute the respondent's

assessment.

7.1 In a letter 11 November 2008, respondent denied petitioner's protest

in this wise:

"A. Expanded Withholding Taxes

00119G
DECISION
CTA Case No. 7902
Page8

1. Outside Services - your contention that taxes due thereon has

been withheld and remitted cannot be considered since no proof
of remittance was submitted . As you stated in our previous reply
letter, there is a balance of P38,305.93 after accounting the
payments made. The computation is clearly shown in the
Expanded Withholding Taxes Computation Sheet.

Your allegation that you are not liable for some of the outside
services because you are not a top ten thousand taxpayer is
without merit since the items are subject to withholding tax by
payees irrespective of whether they were notified as top ten
thousand or not. This was provided under Revenue Regulations
(RR) No. 30-2003 dated December12 , 2003 which amended the
pertinent provisions of RR No . 2-98, 17-2003 and 8-98.
Moreover, your company subjected the outside to withholding tax
as shown by the following data lifted from your records :

OUTSIDE SERVICES AMOUNTS

Direct Cost p 3,869 ,039.00
General & Administrative Expenses 15,794 ,666.00
Other Expenses 1,443,475.00
Total p 21,107,180.00
Withholding Tax Rate 2%
Basic p 422,143.60
Less: Tax Paid per Return 383 ,837.67
Balance P38,305.93
2. Rent - your financial statements clearly showed the breakdown
of rental expenses as follows:

OUTSIDE SERVICES AMOUNTS

Direct Cost p 1,606 ,845 .00
General & Administrative
Expenses 18,012,117.00
Other Expenses 4,003 ,287.00
Total P28,622249.00
Withholding Tax Rate 5%
p 1,181, 112.45

Per available returns filed only P46 , 710 .52 was paid thereby leaving a
balance of P1 , 134,402.22. Your statement that your company remitted
the Expanded Withholding Tax on rental without documentary evidence
cannot be considered as basis for cancellation of the findings per record .

3. Legal and Professional Fees - In the absence of documentary

evidence that payments under legal and professional fees were to
general professional partnership, the findings cannot be adjusted . The
list that was submitted as breakdown of payments to general professional
partnership is not sufficient evidence to establish the fact of payments to
the identified entities. Moreover, this was not presented during the time
of verification for validation purposes. It is not even part of your previous
protest letters.

001197
DECISION
CTA Case No. 7902
Page 9

4. Marketing and Promo - It was considered as part of advertising and

other business agencies for lack of substantiation . This list that has been
submitted as breakdown of marketing and promo may only be considered
if fully supported by source documents to be validated by a Revenue
Officer.

5. Director's Fee - Deficiency withholding on this item was not rebutted by

submitting documentary evidence you merely stated that the company
duly withhold and rem itted the Expanded Withholding Tax on the
director's fee but no proof of remittance has been submitted .

6. Management Fee - No records were submitted to show that the

recipient of the management fee is exempt from income tax and
consequently to withholding tax.

B. Expanded Withholding Tax on Compensation

The deficiency withholding tax on compensation per preliminary

assessment notice dated May 14, 2008 has been deleted due to
submission of SIR Form 1601 -C returns and proof of payment.

Finally, we also reiterate our position in our reply letter dated July
28 , 2008 that Thunderbird Pilipinas Hotel and Resorts, Inc. is subject to
income tax because of the passage of Republ ic Act (RA) No. 9337 which
amended some of the provisions of the exemption of government
corporations, agencies or instrumentalities which includes PAGCOR but
was deleted under RA No. 9337 . The imposition of the tax on your
income was therefore amply discussed in the aforementioned reply letter.

7.2 Petitioner reiterated its protest in a letter dated 18 February 2009 , to

which , respondent replied through a letter dated 24 February 2009. Quoted
hereunder are the relevant portions thereof:

"As regards your latest contention on the withholding

tax on management fees amounting to P1 ,979 ,199.86 that
it has been rendered a non-resident foreign corporation for
services rendered entirely outside the Philippines and
therefore not subject to withholding tax , such allegation
cannot be given due course since no documentary
evidence has been submitted to show the payment to an
alleged non-resident foreign corporation and the nature of
the services rendered has not been verified to justify
withdrawal of the assessment. Moreover, no evidence was
presented to prove that the transaction is indeed exempt
from withholding tax.

"Your discussion on the tax exemption from VAT is

not applicable in this case since the assessment issued
pertains to income and withholding tax only. For income
tax deficiency, the same cannot be withdrawn based on
the reasons previously provided that Thunderbird Pilipinas
Hotels and Resorts, Inc. is subject to income tax because
of the passage of Republic Act (RA) No. 9337 which
amended some of the provisions of the National Internal
Revenue Code (NIRC) of 1997, particularly on exemption
of government corporations, agencies or instrumentalities

001198
DECISION
CTA Case No. 7902
Page 10

which includes PAGCOR but was deleted under RA No.

9337 ."

7.3 As discussed earlier, petitioner's obstinate failure to present the

required documents for audit does not affect the validity of the assessment.
On the contrary, it only bolsters the findings respondent's examiners
because failure to comply with the aforementioned notices implies non-
existence of the required documents.

7.4 With the passage of RA No. 9337 on 01 July 2005, PAGCOR's tax
exemption has been effectively removed , relegating it to the status of an
ordinary corporation . In fact in one case , the Supreme Court said " The
Philippines Amusement and Gaming Corporation (PAGCOR) is not exempt
from income taxes anymore." Thus, for the taxable year in which petitioner
was assessed , there is no exemption from which it may benefit from its
dealings with PAGCOR.

7.5 In the case of Commissioner of Internal Revenue vs. Bank of the

Philippines Island 's, the Supreme Court held :

"Tax assessments by tax examiners are presumed correct

and made in good faith . The taxpayer has the duty to
prove otherwise. In the absence of proof of any
irregularities in the performance of duties, an assessment
duly made by a Bureau of Internal Revenue examiner and
approved by his superior officers will not be disturbed . All
presumptions are in favor of the correctness of tax
assessments. "

Based on the foregoing , the presumption of correctness stands and the

assessment remains indubitable.

8. Petitioner was afforded due process in the assessment of its tax

liabilities for taxable year 2006 .

8.1 On 16 January 2008, respondent sent a Notice of Informal

Conference to petitioner, notifying the latter of the finding of the revenue
officer assigned to the case pursuant to Section 228 of the National Internal
Revenue Code of 1997 in relation to RR No. 12-99. The Notice of Informal
Conference was received by petitioner on 16 January 2008 .

8.2 On 17 June 2008, petitioner received from respondent a Preliminary

Assessment Notice dated 14 May 2008 that appraised the former of its
deficiency IT, EWT and WTC for taxable year 2006 in the aggregate amount
of P14 ,949 ,710.45.

8.3 Respondent sent a Formal Letter of Demand (FLOD) dated October

2008 to petitioner appraising the former of the fact that there is still due from
it deficiency IT and EWT for taxable year 2006 in the aggregate amount
P15,331 ,711.00.

8.4 Petitioner also received Assessment Notices Nos. IT-03-06-241-973-

218 for deficiency IT; WE-03-06-241-973-218 for deficiency EWT for taxable
year 2006 .

001199
DECISION
CTA Case No. 7902
Page If

9. As a consequence of filing a pro forma protest, the assessment

has become final and executory, thus , barring petitioner from filing a Petition for
Review before the Court of Tax Appeals.

9.1 Section 228 of the NIRC of 1997 reads in part:

"Such assessment may be protested administratively by a

filing a request for reconsideration or reinvestigation within
thirty (30) days from receipt of the assessment in such
form and manner as may be prescribed by implementing
rules and regulations . Within sixty (60) days from filing of
the protest, all relevant supporting documents shall have
been submitted ; otherwise , the assessment shall become
final. "

As discussed above, petitioner has consistently failed to submit documents from

the time of audit up to its protest. Petitioner cannot now seek recourse from the
Honorable Court due to the finality of the assessment.

10. All told, the following facts are made clear: (i) petitioner was
required by respondent to submit relevant documents for audit but the former
failed to comply despite several notices; (ii) petitioner was assessed deficiency IT
and EWT for taxable year 2006 based on the best evidence obtainable; (iii)
petitioner was notified of such assessment based on laws, rules and
jurisprudence; and (iv) the assessment is final , executor and unappealable.

On July 1, 2009, petitioner filed its Comment (to Respondent's Motion to

Admit Attached Comment) and Reply (to Respondent's Comment) 23 .

On July 3, 2009, the Court promulgated a Resolution 24 granting the

respondent's Motion to Admit Attached Comment (Re: Comment on Petitioner's
Motion to Suspend Collection of Taxes) and Motion to Admit Attached Answer;
thus , admitting respondent's Comment (Re: Comment on Petitioner's Motion to
Suspend Collection of Taxes) and Answer. Also, the Court noted petitioner's
Manifestation of the advance copies of its pleadings. The Court, however, denied
petitioner's Motion to Suspend Collection of Tax as it was not verified and the
facts and grounds alleged in support of said motion , together with the testimony
of its witness, Mr. Elmer Pedrezuela, do not merit a favorable resolution since
there was no concrete showing that respondent is carrying out the threatened
enforcement of collection by administrative summary remedies.

23
Rollo, pp. 128-135.
24
Rollo, pp. 138-141.

001200
DECISION
CTA Case No. 7902
Page 12

On July 24, 2009, petitioner filed another Motion to Suspend Collection of

25
Tax . This time , it attached a verification .

On August 3, 2009, as it appears that the collection of the assessed

deficiency income tax and withholding tax in the total amount of P15,331 ,711.00
will jeopardize the interest of petitioner, the Court ordered the petitioner to post
an acceptable surety bond in the amount of P30,663,422.00 within ten(10) days
from notice and to comply with the requirements under AM . 04-7-02 SC dated
July 20, 2004. The grant of petitioner's Motion to Suspend Collection of Tax shall
be subject to the fulfillment of the Court's conditions.

On August 25, 2009 and September 18, 2009, respondent2 6 and

petitioner27 , respectively filed their Pre-trial Briefs.

The Joint Stipulation of Facts and Issues (JSFI) 28 was filed by the parties.
A corresponding Resolution 29 dated October 14, 2009 approved said JSFI and
thereafter terminated the pre-trial.

On October 19, 2009, petitioner filed its Submission (of Surety Bond) 30 .

On November 13, 2009, the Court issued a Resolution 31 approving

petitioner's surety bond and enjoining the CIR form collecting the subject
deficiency taxes.

During trial, the petitioner and respondent both presented their respective
testimonial and documentary evidence in support of their positions.

25
Rollo, pp. 142-168.
26
Rollo, pp. 180-185.
27
Rollo, pp. 215-2 24.
28
supra.
29
Rollo, p. 140.
30
Rollo pp. 254-281 .
31
Rollo , pp. 289-291.

001201
DECISION
CTA Case No. 7902
Page 13

On January 16, 2012 , the Court promulgated a resolution 32 ordering both

parties to submit their respective memoranda within thirty (30) days from receipt
of the resolution .

Both petitioner and respondent filed for an extension of time to file their
respective memoranda .

On March 23, 2012, petitioner filed its Memorandum 33 while respondent

filed her Memorandum on March 30, 2012.

On April 10, 2012, the Court issued a Resolution 34 submitting the case for
decision .

THE ISSUES

By agreement of the parties, the issues to be tried and resolved in this

case as enumerated in their Joint Stipulation of Facts and Issues are the
following :

1. Whether or not the alleged deficiency income and expanded withholding

tax assessments for taxable year ended December 31, 2006 in the
aggregate amount of P15,331 ,711 .00, inclusive of interest and
compromise penalties, should be cancelled and withdrawn for lack of
factual and legal bases , particularly-

Income Tax

11 .1 Whether petitioner is liable for the alleged deficiency income tax of

the five percent (5%) based on its gross taxable income of
P151 ,683,405 .00 for taxable year 2006.

11 .2 Whether petitioner is subject to 5% gross income tax on its gaming

revenues pursuant to its Memorandum of Agreement and License issued
by PAGCOR for petitioner's operations of casino within the PPSEFZ.

32
Rollo, p. 1123.
33
Rollo, pp. 1129-1165.
J.< Rollo, p. 1188.

001202
DECISION
CTA Case No. 7902
Page 14

Expanded Withholding Tax

11 .3 Whether petitioner was classified and duly notified by the SIR as

among the top ten thousand (1 0,000) corporations pursuant to Revenue
Regulations No. 17-2003 date June 1, 2003.

11.4 Whether petitioner allegedly failed to withhold the amount of

P38,308.93 on payment of outside Services for taxable year 2006.

11 .5 Whether petitioner allegedly failed to withhold the amount

P1 ,134,402.22 on payment of rent for taxable year 2006.

11 .6 Whether petitioner allegedly failed to withhold the amount of

P759,895.33 on payment of Legal and Professional Fees for taxable year
2006.

11 .7 Whether petitioner allegedly failed to withhold the amount of

P62,761 .90 on payment of Marketing and Promotions for taxable year
2006.

11 .8 Whether petitioner allegedly failed to withhold the amount of

P1 0,279.99 on payment of Director's Fees for taxable year 2006.

11 .9 Whether petitioner allegedly failed to withhold the amount of

P1 ,979,199.86 on payment of Management Fees for taxable year 2006.

11 .10 Whether petitioner is liable to pay a compromise penalty of

P4,000.00 on alleged non-fling of monthly remittance tax returns for the
months January to March 2006 and alphabetical list of payees for taxable
year 2006.

THE DECISION OF THE COURT

The Court shall discuss the issues in seriatim .

I. Income Tax

On the first issue, the controversy basically lies on whether or not

PAGCOR is still exempt from income tax.

001203
DECISION
CTA Case No. 7902
Page I5

The petitioner, as the licensee/contractee of PAGCOR, alleges that it is

exempt from income tax pursuant to PO 1869. It avers that PO 186935 exempts
PAGCOR from income tax and other taxes , except 5% of franchise tax on gross
revenues or earnings, and that said exemption granted shall inure to the benefit
of and extend to the corporation(s) , association(s) , agency(ies) or individuals with
which PAGCOR has any contractual relationship in connection with the
operations of the casino(s) authorized to be conducted in the franchise .

Further, petitioner highlights its reliance to PAGCOR's tax exemption as its

consideration in the contractual relationship with PAGCOR and that petitioner
acted in good faith and complied with the requirements demanded by PAGCOR.

The petitioner's reasoning is bereft of merit.

The issue on whether PAGCOR is still exempt from payment of income tax
is not novel. The Supreme Court has already ruled in the case of Abakada Guro
Party List vs. Honourable Secretary Ermita, eta!., GR No. 168056, September 1,
2005, that the Philippine Amusement and Gaming Corporation is not exempt from
income taxes anymore.

More direct and firm was the pronouncement by the Supreme Court of the
removal of PAGCOR's exemption in the more recent case of Philippine
Amusement and Gaming Corporation (PAGCOR) vs. The Bureau of Internal
Revenue, represented herein by Hon. Jose Mario Bw1ag, GR No. 172087, March
15, 2011 (PAGCOR case) , wherein it was emphasized that with the passage of
Republic Act (RA) No. 9337 36 , PAGCOR is no longer exempt from corporate
income tax. Pertinent to quote the disquisition of the Supreme Court in the
PAGCOR case , to wit:

Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the

National Internal Revenue Code of 1977, petitioner is no longer exempt

35
The charter creating PAGCOR.
36
Effectivity is on November 1, 2005.

001204
DECISION
CTA Case No. 7902
Page 16

from corporate income tax as it has been effectively omitted from the list of
GOCCs that are exempt from it. Petitioner argues that such omission is
unconstitutional, as it is violative of its right to equal protection of the laws under
Section 1, Article Ill of the Constitution :

Sec. 1. No person shall be deprived of life, liberty, or

property without due process of law, nor shall any person be
denied the equal protection of the laws.

In City of Manila v, Laguio, Jr., this Court expounded the meaning and
scope of equal protection , thus :

Equal protection requires that all persons or things

similarly situated should be treated alike, both as to rights
conferred and responsibilities imposed . Similar subjects, in other
words , should not be treated differently, so as to give undue
favor to some and unjustly discriminate against others. The
guarantee means that no person or class of persons shall be
denied the same protection of laws which is enjoyed by other
persons or other classes in like circumstances. The "equal
protection of the laws is a pledge of the protection of equal laws."
It limits governmental discrimination . The equal protection clause
extends to artificial persons but only insofar as their property is
concerned .

xxxx

Legislative bodies are allowed to classify the subjects of

legislation. If the classification is reasonable , the law may
operate only on some and not all of the people without violating
the equal protection clause. The classification must, as an
indispensable requisite, not be arbitrary. To be valid , it must
conform to the following requirements :

1) It must be based on substantial distinctions.

2) It must be germane to the purposes of the law.
3) It must not be limited to existing conditions only.
4) It must apply equally to all members of the class.

It is not contested that before the enactment of R.A. No. 9337,

petitioner was one of the five GOCCs exempted from payment of corporate
income tax as shown in R.A. No. 8424, Section 27 (c) of which, reads:

(c) Government-owned or Controlled Corporations,

Agencies or Instrumentalities. - The provisions of existing special
or general laws to the contrary notwithstanding , all corporations,
agencies or instrumentalities owned and controlled by the
Government, except the Government Service and Insurance
Corporation (GSIS) , the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC) , the Philippine
Charity Sweepstakes Office (PCSO) , and the Philippine
Amusement and Gaming Corporation (PAGCOR) , shall pay
such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in similar
business, industry, or activity.

001205
DECISION
CTA Case No. 7902
Page 17

A perusal of the legislative records of the Bicameral Conference Meeting

of the Committee on Ways on Means dated October 27 , 1997 would show that
the exemption of PAGCOR from the payment of corporate income tax was
due to the acquiescence of the Committee on Ways on Means to the
request of PAGCOR that it be exempt from such tax. The records of the
Bicameral Conference Meeting reveal :

HON . R. DIAZ. The other thing , sir, is we--- I noticed we imposed

a tax on lotto winnings.

CHAIRMAN ENRILE. Wa/a na, tinanggal na na min yon .

HON . R. DIAZ. Tinanggal na ba natin yon?

CHAIRMAN ENRILE. Oo.

HON . R. DIAZ. Because I was wondering whether we covered

the tax on --- Whether on a universal basis, we included a tax on
cockfighting winnings.

CHAIRMAN ENRILE. No, we removed the---

HON . R. DIAZ. I . . . (inaudible) natin yang lotto?

CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.

CHAIRMAN JAVIER. Yeah , Philippine Insurance Commission.

CHAIRMAN ENRILE. Philippine Insurance --- Health , health

ba . Yon ang request ng Chairman , I will accept. (laughter) Pag-Pag-
ibig yon, maliliit na sa tao yon .

HON. ROXAS. Mr. Chairman , I wonder if in the revenue

gainers if we factored in an amount that would reflect the VAT and other
sales taxes---

CHAIRMAN ENRILE. No, we're talking of this measure only.

We will not--- (discontinued)

HON . ROXAS. No, no, no, no, from the --- arising from the
exemption . Assuming that when we release the money into the hands
of the public, they will not use that to --- for wallpaper. They will spend
that eh , Mr. Chairman . So when they spend that---

CHAIRMAN ENRILE . There's a VAT.

HON . ROXAS. There will be a VAT and there will be other

sales taxes no. Is there a quantification? Is there an approximation?

CHAIRMAN JAVIER. Not anything .

HON . ROXAS . So, in effect, we have sterilized that entire

seven billion. In effect, it is not circulating in the economy which is
unrealistic.

CHAIRMAN ENRILE. It does, it does, because th is is taken

and spent by government, somebody receives it in the form of wages

001206
DECIS ION
CTA Case No. 7902
Page 18

and supplies and other services and other goods. They are not being
taken from the public and stored in a vault.

CHAIRMAN JAVIER. That 7.7 loss because of tax exemption.

That will be extra income for the taxpayers.

HON . ROXAS. Precisely, so they will be spending it.

The discussion above bears out that under R.A. No. 8424, the exemption
of PAGCOR from paying corporate income tax was not based on a classification
showing substantial distinctions which make for real differences, but to reiterate ,
the exemption was granted upon the request of PAGCOR that it be exempt from
the payment of corporate income tax.

With the subsequent enactment of R.A. No. 9337, amending R.A. No.
8424, PAGCOR has been excluded from the enumeration of GOCCs that are
exempt from paying corporate income tax. The records of the Bicameral
Conference Meeting dated April 18, 2005, of the Committee on the
Disagreeing Provisions of Senate Bill No. 1950 and House Bill No. 3555,
show that it is the legislative intent that PAGCOR be subject to the payment
of corporate income tax, thus:

THE CHAIRMAN (SEN . RECTO) . Yes , Osmeiia , the

proponent of the amendment.

SEN . OSMENA. Yeah. Mr. Chairman , one of the reasons

why we're even considering this VAT bill is we want to show the world
who our creditors, that we are increasing official revenues that go to the
national budget. Unfortunately today, Pagcor is unofficial.

Now, in 2003 , I took a quick look this morning , Pagcor had a

net income of 9.7 billion after paying some small taxes that they are
subjected to. Of the 9.7 billion , they claim they remitted to national
government seven billion . Pagkatapos, there are other specific
remittances like to the Philippine Sports Commission , etc., as mandated
by various laws, and then about 400 million to the President's Social
Fund. But all in all , their net profit today should be about 12 billion .
That's why I am questioning this two billion . Because while
essentially they claim that the money goes to government, and I
will accept that just for the sake of argument. It does not pass
through the appropriation process. And I think that at least if we
can capture 35 percent or 32 percent through the budgetary
process, first, it is reflected in our official income of government
which is applied to the national budget, and secondly, it goes
through what is constitutionally mandated as Congress
appropriating and defining where the money is spent and not
through a board of directors that has absolutely no accountability.

REP . PUENTEBELLA. Well, with all due respect, Mr.

Chairman , follow up lang .

There is wisdom in the comments of my good friend from

Cebu, Senator Osmeiia.

SEN . OSMENA. And Negros.

001207
DECISION
CTA Case No. 7902
Page 19

REP. PUENTEBELLA. And Negros at the same time ay

Kasimanwa . But I would not want to put my friends from the
Department of Finance in a difficult position , but may we know your
comments on this knowing that as Senator Osmeria just mentioned , he
said, "I accept that that a lot of it is going to spending for basic
services," you know, going to most, I think, supposedly a lot or most of
it should go to government spending , social services and the like. What
is your comment on this? Th is is going to affect a lot of services on the
government side.

THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.

SEN . OSMENA. It goes from pocket to the other, Monico.

REP. PUENTEBELLA. I know that. But I wanted to ask

them , Mr. Senator, because you may have your own pre-judgment on
this and I don't blame you . I don't blame you. And I know you have
your own research . But will this not affect a lot, the disbursements on
social services and other?

REP. LOCSIN . Mr. Chairman . Mr. Chairman, if I can add to

that question also. Wouldn't it be easier for you to explain to , say,
foreign creditors, how do you explain to them that if there is a fiscal gap
some of our richest corporations has [been] spared [from] taxation by
the government which is one rich source of revenues . Now, why do
you save, why do you spare certain government corporations on that,
like Pagcor? So, would it be easier for you to make an argument if
everything was exposed to taxation?

REP . TEVES. Mr. Chair, please.

THE CHAIRMAN (REP. LAPUS) . Can we ask the DOF to

respond to those before we call Congressman Teves?

MR . PURISIMA. Thank you, Mr. Chair.

Yes, from definitely improving the collection, it will help

us because it will then enter as an official revenue although when
dividends declare it also goes in as other income. (sic)

xxxx

REP . TEVES. Mr. Chairman .

xxxx

THE CHAIRMAN (REP. LAPUS). Congressman Teves.

REP . TEVES. Yeah. Pagcor is controlled under Section

27, that is on income tax. Now, we are talking here on value-added
tax. Do you mean to say we are going to amend it from income tax
to value-added tax, as far as Pagcor is concerned?

THE CHAIRMAN (SEN . RECTO) . No. We are just

amending that section with regard to the exemption from income
tax of Pagcor.

001208
DECISION
CTA Case No. 7902
Page 20

xxxx

REP. NOGRALES. Mr. Chairman , Mr. Chairman . Mr.

Chairman.

THE CHAIRMAN (REP. LAPUS). Congressman Nograles.

REP . NOGRALES. Just a point of inquiry from the Chair.

What exactly are the functions of Pagcor that are VA Table? What will
we VAT in Pagcor?

THE CHAIRMAN (REP. LAPUS) . This is on own income

tax. This is Pagcor income tax.

REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa

kanya . Sale of what?

xxxx

REP. VILLAFUERTE. Mr. Chairman , my question is , what

are we VATing Pagcor with , is it the ...

REP. NOGRALES. Mr. Chairman , this is a secret

agreement or the way they craft their contract, which basis?

THE CHAIRMAN (SEN . RECTO) . Congressman

Nograles, the Senate version does not discuss a VAT on Pagcor
but it just takes away their exemption from non-payment of
income tax.

Taxation is the rule and exemption is the exception . The burden of proof
rests upon the party claiming exemption to prove that it is, in fact, covered by the
exemption so claimed . As a rule , tax exemptions are construed strongly against
the claimant. Exemptions must be shown to exist clearly and categorically, and
supported by clear legal provision .

In this case, PAGCOR failed to prove that it is still exempt from the
payment of corporate income tax, considering that Section 1 of R.A. No. 9337
amended Section 27 (c) of the National Internal Revenue Code of 1997 by
omitting PAGCOR from the exemption . The legislative intent. as shown by the
discussions in the Bicameral Conference Meeting, is to require PAGCOR to
pay corporate income tax; hence, the omission or removal of PAGCOR from
exemption from the payment of corporate income tax. It is a basic precept of
statutory construction that the express mention of one person , thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio
unius est exc/usio alterius. Thus, the express mention of the GOCCs exempted
from payment of corporate income tax excludes all others. Not being excepted ,
petitioner PAGCOR must be regarded as coming within the purview of the
general rule that GOCCs shall pay corporate income tax, expressed in the
maxim : exceptio firmat regulam in casibus non exceptis. (Emphasis and
underscoring provided)

001209
DECISION
CTA Case No. 7902
Page 21

It is very clear in the foregoing pronounced PAGCOR case that

PAGCOR's exemption was already eliminated , hence , it is now subject to income
tax. Thus, petitioner, as the licensee or contractee of PAGCOR, cannot rely with
the exemption of PAGCOR to renege on its obligation to pay the proper income
tax.

Petitioner attempts to argue that the PAGCOR case 37 establishes a new

doctrinal interpretation of Section 13(2)(a) and (b) of PO 1869 with respect to the
corporate income tax liability of PAGCOR and should be applied prospectively.
Petitioner avers that the new doctrine should not apply to parties who relied on
the old doctrine and acted thereon in good faith. And considering that PAGCOR,
in the exercise of its government, places it in the category of an agency or
instrumentality of the Government from which contracts entered into by it for
valuable consideration are covered by the non-impairment clause of the
Constitution.

The petitioner's arguments are unmeritorious.

The line of argument by petitioner has been adequately addressed and

ruled upon by the Supreme Court in the PAGCOR case , viz :

Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and
void ab initio for violating the non-impairment clause of the Constitution.
Petitioner avers that laws form part of, and is read into, the contract even without
the parties expressly saying so. Petitioner states that the private parties/investors
transacting with it considered the tax exemptions, which inure to their benefit, as
the main consideration and inducement for their decision to transacUinvest with it.
Petitioner argues that the withdrawal of its exemption from corporate income tax
by R.A. No. 9337 has the effect of changing the main consideration and
inducement for the transactions of private parties with it; thus, the amendatory
provision is violative of the non-impairment clause of the Constitution .

Petitioner's contention lacks merit.

The non-impairment clause is contained in Section 10, Article Ill of the

Constitution , which provides that no law impairing the obligation of contracts shall
be passed. The non-impairment clause is limited in application to laws that
derogate from prior acts or contracts by enlarging , abridging or in any manner
changing the intention of the parties. There is impairment if a subsequent law
changes the terms of a contract between the parties, imposes new conditions,

37
Supra .

001210
DECISION
CTA Case No. 7902
Page 22

dispenses with those agreed upon or withdraws remedies for the enforcement of
the rights of the parties.

As regards franchises , Section 11 , Article XII of the Constitution

provides that no franchise or right shall be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the
Congress when the common good so requires .

In Manila Electric Company v. Province of Laguna, the Court held that

a franchise partakes the nature of a grant, which is beyond the purview of
the non-impairment clause of the Constitution . The pertinent portion of the
case states:

While the Court has, not too infrequently, referred to tax

exemptions contained in special franchises as being in the nature of
contracts and a part of the inducement for carrying on the franchise,
these exemptions, nevertheless, are far from being strictly contractual
in nature. Contractual tax exemptions, in the real sense of the term and
where the non-impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in contracts, such
as those contained in government bonds or debentures, lawfully
entered into by them under enabling laws in which the government,
acting in its private capacity, sheds its cloak of authority and waives its
governmental immunity. Truly, tax exemptions of this kind may not be
revoked without impairing the obligations of contracts. These
contractual tax exemptions , however, are not to be confused with tax
exemptions granted under franchises. A franchise partakes the
nature of a grant which is beyond the purview of the non-
impairment clause of the Constitution. Indeed, Article XII, Section
11, of the 1987 Constitution, like its precursor provisions in the
1935 and the 1973 Constitutions, is explicit that no franchise for
the operation of a public utility shall be granted except under the
condition that such privilege shall be subject to amendment,
alteration or repeal by Congress as and when the common good
so requires.

In this case , PAGCOR was granted a franchise to operate and maintain

gambling casinos , clubs and other recreation or amusement places, sports,
gaming pools, i.e., basketball , football , lotteries, etc., whether on land or sea,
within the territorial jurisdiction of the Republic of the Philippines. Under Section
11, Article XII of the Constitution. PAGCOR's franchise is subject to
amendment, alteration or repeal by Congress such as the amendment
under Section 1 of R.A. No. 9377. Hence. the provision in Section 1 of R.A.
No. 9337, amending Section 27 (c) of R.A. No. 8424 by withdrawing the
exemption of PAGCOR from corporate income tax, which may affect any
benefits to PAGCOR's transactions with private parties, is not violative of
the non-impairment clause of the Constitution . (Emphasis and underscoring
provided)

Indeed, it cannot be said the there was a violation of the non-impairment

clause of the Constitution.

001211
DECISION
CTA Case No. 7902
Page 23

Petitioner finally argues that since it is duly registered enterprise with the
PPSEFZ, it is entitled to the benefits applicable to the Subic Special Economic
and Freeport Zone under RA No. 7227 and other Export Processing Zones,
pursuant to Section 5 of Proclamation no. 216, thus , such is subject to 5% of
gross income tax in lieu of the gross income earned by all business and
enterprises. It avers that its payment for license fee/gross gaming revenue of
25% to PAGCOR is inclusive of the 5% income tax imposed on "gross revenues".

Again, the contention of petitioner lacks merit.

The assessment by the respondent is based on a 5% computation, not on

the regular rate of 35% basic income tax computation . The 5% computation by
the respondent clearly recognizes the privilege of the petitioner as a duly
registered enterprise in the PPSEFZ.

The Court, further, does not agree with the argument of petitioner that its
payment of the 25% license fee/gross gaming revenue is already inclusive of the
5% income tax imposed on gross revenues . The 25% license fee/gross gaming
revenue paid by petitioner is different and distinct from the income tax to which
petitioner is being assessed. The 25% gross gaming revenue is being paid by
virtue of the License 38 entered into by petitioner with PAGCOR. It is based on the
aggregate gross gaming revenue of the Fiesta Casino.39 On the other hand , 5%
income tax is based on the total gross revenues of the petitioner regardless from
where it is obtained and even if not specifically originating from the Fiesta Casino.
Thus, the Court is not convinced that the 25% license fee/gross gaming tax is
inclusive of the 5% income tax as there was no substantial evidence nor
argument presented by petitioner to bolster the same.

38
Exhibit "CCC".
39
Exhibit "CCC-1".

001212
 DECISION
CTA Case No. 7902
Page 24

Therefore, finding the arguments of the petitioner to be unmeritorious with

regard petitioner's income tax, the Court upholds the assessment of the
respondent, computed as follows :

I. Income Tax
Gross Taxable Income per Return p 151,683,405.43
Add : Purchases Paid not in the name of Thunderbird 11,068,373.43
Taxable Income p 162,751,778.43
5%
Tax Due p 8,137,588.92
Less: Basic Tax Paid 553,418.67
Basic Income Tax Deficiency p 7,584,170.25

II. Expanded Withholding Tax

Upon comparison of the expenses subject to EWT as reflected on

petitioner's Audited Financial Statements 40 and those of petitioner's BIR Forms
No. 1601-E41 , respondent assessed petitioner the amount of P5,414, 109.74
deficiency EWT for taxable year 2006, computed as follows :

Legal and
Professional Management Marketing
Outside Services Rent Fees Fee and Promo Director's Fee

Direct Cost p 3,869,039.00 p 1,606,845.00 - - - -

Gen & Admin Expenses 15,794,666.00 18,012,117.00 p 3,967,247.00 P13,397,504.00 P3 ,138,095.00 P1 ,333,791 .00

Other Expenses 1,443,475.00 4,003,287.00 2,206,984.00 - - -

Total p 21 ,107,180.00 P23,622,249.00 p 6,174,231.00 P13,397,504.00 P3, 138,095.00 P1 ,333, 791.00

Tax Rate 2% 5% 15% 15% 2% 10%

Basic EWT Due p 422,143.60 p 1,181,112.45 p 926,134.65 p 2,009,625.60 p 62,761 .90 p 133,379...!Q_
Less: EWT Paid per
Return 383 ,837.67 46,710.23 166,239 .32 30,425.74 - 123,099.11

Deficiency EWT p 38,305.93 p 1,134,402.22 p 759,895.33 p 1,979,199.86 p 62,761 .90 p 10,279.99

40
Exhibit "S".
41
Exhibit "B", "C", "D", "E", "F", "G", "H", "1", "J", "K", "L".

001213
DECISION
CTA Case No. 7902
Page 25

A. Expanded Withholding Tax on Outside Services

Petitioner alleges that it duly withheld and remitted the EWT on its
payments for outside services. Also , it alleges that some of its payments for
outside services do not require the withholding of tax since petitioner is not
among the top 10,000 corporations and has not been notified as such by the SIR.

On the other hand, respondent avers that petitioner is liable to pay for
some of the outside services irrespective of whether it was notified as one of the
top 10,000 corporation, pursuant Revenue Regulations (RR) No. 30-2003.

The Court finds respondent's argument meritorious.

The requirement to withhold is provided under RR No. 30-2003 dated

December 12, 2003, which amended pertinent provisions of RR Nos. 2-98, 8-98
and 17-2003.

Section 4 of RR No. 30-2003 provides:

Section 4. Income Payments to other Contractors.- Sec. 2.57.2(E) of

Revenue Regulations No. 2-98, as amended, is hereby further amended to
correct the typographical error in RR 17-2003 to read as follows :

"Sec. 2.57.2. Income payments subject to creditable withholding tax and

rates prescribed thereon . -

XXX XXX

(E) Income payments to certain contractors. - On gross payments to the

following contractors, whether individual or corporate- Two percent (2%)

(1) General engineering contractors . -

XXX XXX
(2) General building contractors . -
XXX XXX
(3) Specialty contractors. -
XXX XXX
(4) Other contractor. -
XXX XXX

001214
DECISION
CTA Case No. 7902
Page 26

Upon review, it appears that petitioner failed to submit any documentary

evidence showing that the income payments for outside services do not fall in
any of the transactions subject to 2% EWT under Section 2.57 .2(E) of RR No. 2-
98, as amended by RR No. 30-2003.

It is already well-settled that tax assessments by tax examiners are

presumed correct and made in good faith , with the taxpayer having the burden of
proving otherwise. Failure to present proof of error in the assessment will justify
the judicial affirmance of said assessment. 42 Hence, petitioner is liable for the
EWTon outside services amounting to P38,305.93, computed as follows:

OUTSIDE SERVICES AMOUNTS

Direct Cost p 3,869,039.00
General and Administrative Expenses 15,794,666.00
Other Expenses 1,443,475.00
Total p 21 ,107,180.00
Withholding Tax Rate 2%
Basic p 422 ,143.60
Less: Tax Paid Per Return 383,837 .67
Adjusted Basic Deficiency EWT p 38,305.93

B. Expanded Withholding Tax on Rent

As to BNT on rent, petitioner submits that the amount of rent expense

booked in its 2006 books of account includes "Deferred Rent Expense" account
in the amount of P14,201 ,733.00 which was recorded as expense in the books of
petitioner purely for compliance with Philippine Accounting Standards (PAS) No.
17 on Leases but was not claimed as expense for income tax purposes. This
was indicated on Line 11543 of petitioner's Annual Income Tax Return for taxable
year 2006 44 wherein the amount of P14,201 ,733.00 was reflected as a reconciling
item on petitioner's net income per books as against its taxable income. Thus, the

2
• Marcos II vs. CA. et al., G.R. No. 120880, June 5, 1997.
3
• Exhibit "A-2".
•• Exhibit "A".

001215
DECISION
CTA Case No. 7902
Page 27

said deferred rent expense was never claimed as deduction from its gross
income for taxable year 2006.

In his Judicial Affidavit dated February 24, 2010 45 , Mr. Elmer R.

Pedrezuela, petitioner's Financial Controller, explained that the "rent expense"
booked as deferred rent expense for accounting purposes pertains to the lease of
properties by petitioner from the Bases Conversion Development Authority
(BCDA) and Poro Point Management Corporation (PPMC). A lease agreement46
was entered into by petitioner with BCDA and PPMC that covers the lease of the
following properties: former Voice of America facilities and land ; Poro Point
Cottages, San Fernando Coral Promenade and Tourism Complex, all of which
are situated in Brgy. Poro, San Fernando City, La Union.

The lease agreement notably provides that petitioner is entitled to non-

payment of lease rentals for a period of six (6) months for the 4.8 hectare former
VOA facilities and Twenty-four (24) months for the 60.7 hectare Tourism
Complex, with regular escalation of lease payments, thus, the amount of lease
payments varies per year.

On the other hand , respondent avers that petitioner's contention of

remittance of the EWT on rental without documentary evidence cannot cancel
said assessment.

The Court agrees with petitioner's assertion .

Section 2.57.4 of RR No. 2-98, as amended , prescribes the time of

withholding of the subject EWT as follows :
Sec. 2.57.4. Time of withholding. - The obligation of the payor
to deduct and withhold the tax under Section 2.57 of these Regulations
arises at the time an income payment is paid or payable, or the income
payment is accrued or recorded as an expense or asset, whichever is
applicable, in the payor's books, whichever comes first. The term

45
Exhibit 'W'.
46
Exhibit "T".

001216
DECISION
CTA Case No. 7902
Page 28

"payable" refers to the date the obligation becomes due, demandable or

legally enforceable.

Provided, however, that where income is not yet paid or

payable but the same has been recorded as an expense or asset,
whichever is applicable, in the payor's books, the obligation to withhold
shall arise in the last month of the return period in which the same is
claimed as an expense or amortized for tax purposes.

Accordingly, petitioner is required to withhold EWT on its rental when it is

either paid, becomes payable or was accrued or claimed as expense for income
tax purposes, whichever comes first.

The Deferred Rent Expense of P14,201 ,733.00 was not yet paid or
payable in 2006 but was reported in petitioner's audited financial statements for
financial statement purposes to comply with PAS No. 17. Moreover, it appears
that petitioner did not accrue or claimed the amount of P14,201 ,733.00 as
deductible expense for income tax purposes 47 . Thus, pursuant to Section 2.57.4
of RR No. 2-98, petitioner is not mandated to withhold 5% EWT on the Deferred
Rent of P14,201 ,733.00. Consequently, said amount of P14,201 ,733.00 should
be deducted from the total tax base of P23,622,249.00 reducing the basic
deficiency EWTon rent to P424,315.57, computed as follows :

Rent reflected as part of:

Direct Cost p 1,606,845 .00
Gen & Admin Expenses 18,012,117.00
Other Expenses 4,003,287.00
Total Rentals p 23,622 ,249.00
Less: Deferred rent expense 14,201 '733.00
Total Rent subject to EWT p 9,420,516 .00
Tax Rate 5%
Basic Deficiency EWT p 471 ,025.80
Less: Tax Paid per Return 46,710.23
Adjusted Basic Deficiency EWT p 424,315.57

7
• Exhibit "A-2".

001217
DECIS ION
CTA Case No. 7902
Page 29

C. Expanded Withholding Tax on Legal and Professional Fees

Petitioner alleges that the account "Legal and Professional Fees" included
accruals and/or payments made to general professional partnerships (GPPs) as
follows : a) P795,000.00 to Punongbayan & Araullo (P&A) ; and (b) P216,233.38
to Fortun Narvasa Salazar Law Office (Fortun Narvasa) , which are not subject to
income tax and consequently to EWT pursuant to Section 22(8) in relation to
Section 27 of the NIRC of 1997, as amended .

Respondent, however, alleges that the list submitted by the petitioner as

breakdown of payments to GPPs is not sufficient evidence to establish the fact of
payment.

The Court agrees with petitioner.

Indeed , income payments made to professional partnerships as juridical

persons are exempt from income tax vis-a-vis the expanded withholding tax. The
partners of the GPPs are the ones liable, in their individual capacity, for the
payment of income tax pursuant to Section 26 of the NIRC of 1997. This was
elucidated by the Supreme Court in the case of Rufino R. Tan, et at. vs. Ramon
R. del Rosario Jr., as Secretary of Finance and Jose U. Ong, as Commissioner
of Internal Revenue 48 , to wit:

'"Exempt partnerships', upon the other hand, are not similarly identified
as corporations nor even considered as independent taxable entities for income
tax purposes. A general professional partnership is such an example. Here, the
partners themselves, not the partnership, although it is still obligated to file an
income tax return (mainly for administration and data), are liable for the payment
of income tax in their individual capacity computed on their respective and
distributive shares of profits. In the determination of the tax liability, a partner
does so as an individual, and there is no choice on the matter. In fine , under the
Tax Code on income taxation , the general professional partnership is deemed to
be no more than a mere mechanism or a flow-through entity in the generation of
income by, and the ultimate distribution of such income to , respectively, each of
the individual partners ."

48
GR. Nos. 109289 and 109446, October 3, 1994.

001218
DECISION
CTA Case No. 7902
Page 30

Petitioner submitted Certificates of Corporate Filing/lnformation 49 issued

by the Securities and Exchange Commission in order to prove that P&A and
Fortun Narvasa are GPPs.

In support of the professional fees paid to Fortun Narvasa , petitioner

presented its "Transaction Reprint Journal"50 showing the amount of P216,223.38
as legal fees due to Fortun Narvasa and "Manual Payments Reprint Journal"51
showing that the amount of P216,223.38 was debited to "Trade Payables" and
credited to "Cash".

However, the Court finds the said documents insufficient to prove actual
payment of the amount of P216,223.38 to Fortun Narvasa. Petitioner should
have presented billing statements, invoices or official receipts issued by Fortun
Narvasa.

As regards the accruals and/or payments made to P&A, petitioner

submitted a print-out of its "Computer Checks Posting Journal"52 , P&A official
receipts 53 , P&A billing statements 54 , and Reconciliation of Audit Fee for the year
ending December 31 , 2006 55 .

A perusal of Bill No. 12802656 issued by P&A to petitioner covering the

audit of petitioner's 2006 financial statements shows that the agreed audit fee for
the year 2006 amounted to P400,000.00 and a monthly retainer fee of
P15,000.00 for the months of October, November and December 2006. Thus,
audit fees due to P&A for the year 2006 amounted to P445,000.00 57 .

9
• Exhibits "PP " and ""UU".
50
Exhibit "QQ".
51
Exhibit "RR".
52
Exhibits "X", "AA", "DO" and "GG".
53
Exhibits "Y" "BB" "EE" and "HH"
54
Exhibits "Z< "CC": "FF" and "II". .
55
Exhibit "00".
56
Exhibit "II".
57
P400,000.00 plus P45, 000.00 (P1 5,000/month x 3 months).

001219
DECISION
CTA Case No. 7902
Page 31

In sum, the basic deficiency EWT on legal and professional fees should be
adjusted to P693,145.33, computed as follows:

Legal and Professional Fees p 6,174,231 .00

Less: Payments to GPPs 445,000.00
Legal and Professional Fees subject to EWT p 5,729,231.00
Tax Rate 15%
Basic Deficiency EWT p 859,384.65
Less: Tax paid per Return 166,239.32
Adjusted Basic Deficiency EWT p 693,145.33

D. Expanded Withholding Tax on Management Fee

Petitioner alleges that the amount of Management Fees appearing in the

audited financial statements pertains to payments made to Thunderbird Resorts,
Inc. (TRI) , a non-resident foreign corporation providing management services to
petitioner outside the Philippines. Said service is pursuant to a Casino
Management Consultancy Agreement 58 entered into by both parties on April 1,
2006.

Invoking Section 23(F) of the NIRC of 1997, as amended , in relation to

Section 42(A) of the NIRC of 1997, as amended, petitioner maintains that
services performed outside the Philippines by a foreign corporation, such as TRI,
is not subject to Philippine income tax and consequently to withholding tax.

Respondent opposes such claims of petitioner and further argues that

petitioner failed to submit documentary evidence to show payment to an alleged
non-resident foreign corporation nor was there evidence that the nature of the
services or the transactions was truly exempt.

58
Exhibit "W".

001220
DECISION
CTA Case No. 7902
Page 32

The Court finds respondent's argument meritorious.

Section 23(F) of the NIRC of 1997, as amended , in relation to Section

42(A) of the same Code, states that a foreign corporation , whether engaged or
not in trade or business in the Philippines, is taxable only on income derived from
sources within the Philippines.

For the Court to clearly establish non-liability of the petitioner, It finds

support to the "Source of Income" doctrine. In the case of C/R vs. Baier-Nickel,
GR No. 153793, August 29, 2006, the "source of income" was explained by the
Supreme Court, to wit:

The Court reiterates the rule that "source of income" relates to the
property, activity or service that produced the income . With respect to
rendition of labor or personal service, as in the instant case , it is the place
where the labor or service was performed that determines the source of the
income. There is therefore no merit in petitioner's interpretation which equates
source of income in labor or personal service with the residence of the payor or
the place of payment of the income.

XXX XXX XXX

The decisive factual consideration here is not the capacity in which

respondent received the income, but the sufficiency of evidence to prove
that the services she rendered were performed in Germany. Though not
raised as an issue, the Court is clothed with authority to address the same
because the resolution thereof will settle the vital question posed in this
controversy.

The settled rule is that tax refunds are in the nature of tax exemptions
and are to be construed strictissimi juris against the taxpayer. To those therefore,
who claim a refund rest the burden of proving that the transaction subjected to tax
is actually exempt from taxation . (Emphasis and underscoring provided)

Analyzing the evidence presented by petitioner, the Court is not convinced

that the services were indeed performed outside the Philippines. While TRI 's
office is not in the Philippines, the actual services can actually be performed here
in the Philippines, considering that the subject of the service, which is the Casino,
is actually located in the Philippines. The actual performance of the services is
important for the Court to determine.

001221
DECISION
CTA Case No. 7902
Page 33

After scrutiny of the records of the case , it appears that petitioner failed to
discharge the burden of proving that the performance of the services was done
outside the Philippines and exempt from the application of income tax. Thus, the
Court finds petitioner liable for EWT on Management Fees in the amount of
P1 ,979,199.86 as assessed by respondent.

E. Expanded Withholding Tax on Marketing and Promotion

Petitioner maintains that it is not liable for the deficiency EWT on

Marketing and Promotion because petitioner is not among the top 10,000
corporation. Furthermore, petitioner alleges that there are no other provisions in
RR No. 2-98, as amended , which can be used as basis for the withholding tax of
its payments for Marketing and Promotion. It opines that the Marketing and
Promotion expenses should not be considered as part of payments for
advertising and other business agencies.

Respondent counters that petitioner failed to withhold and remit the taxes
due for petitioner's Marketing and Promotion expenses. She further alleges that
the list59 that has been submitted as breakdown of Marketing and Promotion may
only be considered if fully supported by source documents.

The Court agrees with respondent.

Petitioner failed to submit documentary proofs in order for the Court to

verify the actual nature of its Marketing and Promotion expenses. Thus,
respondent's deficiency EWT assessment amounting to P62,761 .90 on Marketing
and Promotion is upheld .

59
BIR Records . p.430.

001222
DECIS ION
CTA Case No. 7902
Page 34

F. Expanded Withholding Tax on Director's Fees

The assessed EWT on Director's Fees in the amount of P102,799.90

arose from the discrepancy between the director's fees per audited financial
statements and per Bl R Forms No. 1601-E filed by petitioner for taxable year
2006, as computed below:

Per Aud ited Financial Statements p 1,333,791.00

Per SIR Returns (1601-E) 1,230 ,99 1.1 0
Difference p 102,799.90

Petitioner alleges that it duly withheld and remitted the EWT on the
director's fees . The respondent asserts the contrary.

After further study and analysis, the Court agrees with respondent.

The records of the case do not show that petitioner was able to account for
the discrepancy in the director's fees of P1 02 ,799.90. Consequently, petitioner
should be held liable for the corresponding 10% EWT of P1 0,279.99.

In summary, petitioner is liable to pay basic deficiency EWT in the amount

of P1 ,228,806.72, computed as follows :

Amount
Deficiency EWT on Outside Services p 38,305.93
Deficiency EWT on Rent 424,315.57
Deficiency EWT on Legal and Professional Fees 693,145.33
Deficiency EWT on Management Fees 1,979,199.86
Deficiency EWT on Marketing and Promotions 62,761.90
Deficiency EWT on Director's Fee 10,279.99
Total p 3,208,008.58

The compromise penalty imposed by respondent in the amount of

P4,000.00 is hereby cancelled as there is no compromise agreement entered into
by the parties.

001223
DECISION
CTA Case No. 7902
Page 35

To end , it is worthy to note that assessments are prima facie presumed

correct and made in good faith . It is the taxpayer and not the BIR who has the
duty of proving otherwise. In the absence of proof of any irregularity in the
performance of official duties, an assessment will not be disturbed . Failure to
present proof of error in the assessment will justify judicial affirmance of said
assessment. 60

WHEREFORE , premises considered , the assessments against petitioner

covering deficiency income tax and EWT for taxable year 2006 are hereby
AFFIRMED with some modifications.

Accordingly, petitioner is hereby ORDERED to pay respondent deficiency

income tax and EWT for taxable year 2006 in the respective amounts of
P12,488,946.65 and P5,440,870.44, inclusive of 25% surcharge and 20%
deficiency interest imposed pursuant to Sections 248 A(3) and 249(8) of the
NIRC of 1997, computed as follows :

Deficiency Income Tax

Basic Tax Due p 7,584,170.25
Add : 25% Surcharge 1,896 ,042.56
20% Interest (04/16/07 to 04/09/09) 3,008,733.84
Total Amount Due P12,488,946.65

Deficiency EWT
Basic Tax Due p 3,208,008.58
Add : 25% Surcharge 802 ,002.15
20% Interest (01/16/07 to 04/09/09) 1,430,859.72
Total Amount Due p 5,440,870.44

GRAND TOTAL - DEFICIENCY INCOME TAX AND EWT P17,929,817.09

6
° C/R vs. CA, 242SCRA 313-3 14.

001224
DECISI ON
CTA Case No. 7902
Page 36

Likewise, petitioner is ORDERED to pay delinquency interest at the rate of

20% per annum on the total deficiency taxes of P17,929,817.09 computed from
April 10, 2009 until full payment thereof pursuant to Section 249(C)(3) of the 1997
NIRC.

SO ORDERED.

L- ~ · c:~
ERNESTO D. ACOSTA
Presiding Justice

WE CONCUR:

E~.UY
Associate Justice

CERTIFICATION

Pursuant to Article VIII , Section 13 of the Constitution, it is hereby certified

that the conclusions in the above Decision were reached in consultation before
the case was assigned to the writer of the opinion of the Court's Division.

~ lP · \)~
ERNESTO D. ACOSTA
Presiding Justice

001225